The POWER Interview: The IRA's Impact on Tax Credits, Tax Equity, and Renewable Energy

The Inflation Reduction Act (IRA) represents the largest incentive effort for clean energy in U.S. history. Its impact touches multiple sectors, including solar, wind, hydrogen, energy storage, and more. The IRA includes more than 70 investment, production, and excise credits designed to facilitate the transition to cleaner energy production.

The legislation promotes advanced manufacturing, and supports electrification and decarbonization, including electric vehicles (EVs), and also the use of alternative fuels and energy-efficient technologies. It also bolsters loan programs from the U.S. Dept. of Energy and the U.S. Dept. of Agriculture.

Lauren Collins, a tax partner with Vinson & Elkins, has noted that “renewable projects and business models involve complex technologies, counter-parties, and tax structures.” Collins’ work includes helping energy project developers understand tax matters related to project finance, with an emphasis on renewable energy and infrastructure assets. She has represented utilities, investors, and major companies working to develop renewable energy installations.

Collins provided POWER with information and insight about the multiple ways the IRA is supporting renewable energy, and the way developers can ensure they take best advantage of government incentives, through tax credits, tax equity, and more.

POWER: Tax equity has been considered an important element of financing renewable energy projects. What exactly does tax equity mean?

Collins: At its most basic, tax equity simply means an investor who is earning a large portion of its return on investment in the form of tax credits and benefits.

In the clean energy space, very often, the developers and operators of clean energy projects do not generate taxable income that can be used to offset tax credits and benefits—so, although the U.S. tax code has for many years granted valuable tax benefits for clean energy projects, the developers and operators could not really take advantage of this value. Instead, they would have to find one of these tax equity investors (usually large financial institutions or corporates with big tax bills) who can take advantage of these benefits and unlock their value. Before the IRA, in order to do so, the tax equity investor needed to be a direct or indirect owner of the credit generating asset–or in limited cases a lessee of the asset–requiring the developer/operator to enter into fairly complicated tax equity partnership or lease structures with the tax equity investor. This structure is great for more established technologies and developers and projects with bigger credit values but given the complexity and the relatively small pool of tax equity investors, this meant that smaller and/or more novel projects could not get tax equity financing.

POWER: Tell me about the most important aspects of the IRA that have transformed renewable energy project development?

Collins: First and foremost, the IRA made it such that developers and operators have other ways of monetizing the value of tax credits besides tax equity. The IRA enacted a new provision of the tax code, which enables owners of assets that generate certain clean energy tax credits to sell the credits to a third party for cash–no tax equity investor or complicated structuring required. The credit seller should still expect to enter into a credit purchase and sale agreement with the credit buyer and provide fulsome representations and covenants, but the transaction is typically much more efficient and significantly expands the types of projects that can benefit and the pool of players.

The IRA also enabled certain types of tax exempt and governmental entities to elect to turn a tax credit into a cash payment from the government (i.e., “direct pay” or “elective payment” elections). These types of entities usually do not pay tax and were previously unable to utilize clean energy tax credits and benefits, but with the IRA they can make this election and essentially receive a cash payment equal to the amount of the credit that otherwise would have been generated. This option is also available for all taxpayers that are eligible for the carbon capture credit, the newly enacted hydrogen credit, and the advanced manufacturing tax credit for a five-ish year period. Again, enabling more projects and entities to benefit.

POWER: For which projects or sectors is the IRA most impactful?

Collins: The IRA expanded and extended clean energy tax credits really across the range of clean energy projects–solar, wind, geothermal, hydropower, biomass–but enacted new credits for types of projects that were previously not covered–stand-alone battery storage, hydrogen, EVs and EV charging and infrastructure. In addition, for projects placed in service after 2024, there are brand new credits that are neutral to the technology type but available so long as greenhouse gas emissions are zero. This makes it possible for innovative technologies and projects to get the benefits of tax incentives. Said simply, the IRA is having a significant impact just about everywhere in the clean energy space, and we are seeing deal flow, investment, and development experience a huge boom since enactment of the IRA.

One area in particular that we are seeing taking off is around domestic manufacturing–IRA provided a credit for manufacturers of certain clean energy components produced in the U.S. and a complimentary credit for owners of projects that utilize a minimum amount of U.S.-manufactured materials. This is an area where we are seeing the impact of the IRA immediately and in real time–manufacturers are looking to onshore operations and project developers, and are more focused on sourcing U.S.-manufactured products in direct response to these IRA changes.

POWER: What about energy equality?

Collins: In addition to expanding benefits for all types of clean energy facilities and encouraging domestic manufacturing, the IRA incentivizes new power facilities and energy assets to be sited in low-income communities and/or communities that once relied on jobs in carbon-intensive industries–promoting environmental justice and ensuring that communities with displaced workers and that are most impacted by client change are not left behind in the energy transition.

The IRA also addresses the fact that a transition of our energy economy from carbon-intensive to carbon-neutral will impact the U.S. workforce significantly. To support this at the individual level, the legislation essentially mandates that in order for companies to get the full benefit of the IRA, laborers and mechanics who construct, alter, or repair a facility that might benefit from one of the aforementioned credits be paid “prevailing wages,” and that the workforce for development of a facility include a robust apprenticeship program. In other words, the government will not provide the highest credit rates to developers of a renewable or clean project unless that developer has paid a good, living wage to its workforce and invested in training of the domestic labor force (and if it doesn’t, the developer may be subject to severe penalties).

POWER: How can companies look to take advantage of the IRA?

Collins: The low-hanging fruit is to buy tax credits–it is a way to provide meaningful investment into the clean energy transition but lower your tax bill (a win-win). There are brokers and other arrangers who can help prospective buyers of large credits find a seller. For companies with smaller tax bills that want to enter the market there are emerging online platforms that are well-suited to match credit sellers and buyers.

Larger companies may want to directly invest or purchase projects that may provide that company clean energy or storage solutions and/or generate IRA tax credits. Lenders may also be able to provide debt financing to clean energy developers underwritten by expected IRA tax credits.

There are also options to “green your fleet” by purchasing both new and old electric vehicles or module machinery. And there are revamped incentives for investment in energy-efficient improvements to buildings.

POWER: What does the milestone of more than 59,000 facilities requesting registration numbers through the new IRS Energy Credits Online portal signify for the IRA?

Collins: I think that it means it is working, and just getting started. The industry is bigger and more diverse than ever. I’ve worked in this space for over a decade and, prior to the IRA, had never been fortunate to get to know such a diverse group of developers and investors, consider new project types, and work on exciting tax structuring. That 59,000 figure seems large, but I expect it will pale in comparison to the volume of facilities we will see coming online in the near term.

POWER: What is on the horizon for the future of the IRA and renewables?

Collins: Despite the incredible amount of activity in the industry to date, there have been  a lot of players sitting on the sideline waiting for guidance to come out of the Treasury and IRS, and to see what happens in D.C. this fall. Once some of that uncertainty falls away, then we will really see the full impact of the IRA. Notably, I expect domestic manufacturing will experience a boom after final guidance on the implementation of those tax benefits. And I think the entrance of corporates into the credit-buying market will have a snowball effect–a few corporates are dipping their toes in the water, but the more the market gets going and the value of the transaction is proven (and made public in corporate disclosures), folks should be flooding to the market.

—Darrell Proctor is a senior associate editor for POWER (@POWERmagazine).